We analyze the incentives of a telecommunications incumbent to invest
and give access to a downstream entrant to a next generation network,
NGN. We model the industry as a duopoly, where a vertically integrated
incumbent and a downstream entrant, that requires access to the
incumbent's network, compete on Hotelling's line. The incumbent can
invest in the deployment of a NGN that improves the quality of the
retail services. Access to the old network is regulated, but access to
the NGN is not. If the innovation is drastic, the incumbent always
invests in the NGN, but does not give access to the entrant. If the
innovation is non-drastic and if the access price to the old network is
low, the incumbent voluntarily gives access to the NGN. If the
innovation is non-drastic, there is no monotonic relation between the
access price to the old network and the incumbent's incentives to
invest. A regulatory moratorium emerges as socially optimal, if the
innovation is large but non-drastic. We also analyze the case where both
rms can invest in the deployment of a NGN